Financial Impacts and Boardroom Perspectives Amid COVID-19

Hosted by Oliver Wyman, RMA’s recent Risk Readiness Special Coverage Webinar focused on issues Board members are facing as the U.S. banking industry manages the financial consequences of the COVID-19 pandemic.

The panelists included Edwin Anderson, Partner, Risk & Public Policy, Jai Sooklal, Partner, Head of Americas Treasury Practice, Eric Czervionke, Partner, Financial Services and Corporate and Institutional Banking, Douglas Elliott, Partner, Risk & Public Policy, Kevin Blakely, Oliver Wyman Senior Advisor, Board Member at HSBC USA and formerly Chief Risk Officer at KeyCorp and Huntington, and Ken Phelan, Oliver Wyman Senior Advisor, Board Member at Huntington and formerly Chief Risk Officer at the U.S. Department of the Treasury, RBS Americas, Fannie Mae, and Wachovia.

The speakers addressed the public sector response and opportunities including the U.S. government response of the PPP and the Main Street Lending Program. Banks need to determine how best to participate in these programs to minimize their risks and take advantage of the opportunities they present. A cautious approach that is focused on aiding existing good clients has appeal. But it would come with serious political and public relations risks and could cost market share. A more aggressive lending program could win new clients and gain political and public relations advantages, but might be very costly if the recession is extremely severe. Banks need to navigate this pandemic very carefully.

The financial impact has been substantial for U.S. banks with a significant decline in earnings in Q1. Aggregate bank earnings declined by approximately 60% quarter on quarter, with considerable variation by institution type. Provisions for credit losses (PCL) were the main driver, which largely reflected bank’s future expectations. Headwinds exist for the near term capital outlook, particularly if conditions deteriorate further. With the Federal Reserve fully committed to supporting liquidity and with funding markets having stabilized considerably, capital is likely to be a more pressing concern for banks in Q2 and beyond.

The panelists discussed issues surrounding scenarios due to uncertainty in analysis. Analysis engines are calibrated on historical data which is challenged right now. Still, scenario analysis is critical to understanding the range of earnings and risk outcomes across alternative rate paths and balance sheet positions.

In order to gain some confidence in the numbers, the panelists suggested high level questions for Board members and management teams. These include the following:

  • What historical data was the model fit on?
    The obstacle: The current crisis fits the mold of neither financial (e.g. The Great Recession) nor technological crises (e.g. dot-com bubble).
  • What are the key assumptions of the model?
    The obstacle: Many commonly used assumptions (e.g. asset liquidity, economic equilibrium) may no longer hold true and must be challenged.
  • And what correlations are used?
    The obstacle: Relationships between different economic factors vary significantly by type and severity of crisis. The lack of appropriate data could lead to accidentally replaying previous crises.

A recording of the webinar is available for download here.

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